* Seven & i to close 40 Ito Yokado stores (Adds detail of business plan)

TOKYO, Oct 6 (Reuters) - Seven & i Holdings Co Ltd, Japan's second-biggest retailer by sales, on Thursday said it has entered a capital and business alliance with smaller peer H2O Retailing Corp, with both companies planning to take a 3 percent stake in each other.

Under the agreement, Seven & i will transfer its department stores in the Kansai region of western Japan to H2O, which in a separate statement said the partnership would help bolster its dominance in the area. The two said they will look at other areas for possible cooperation.

That pact is part of a new business plan also released Thursday by Seven & i, in which the retailer said it aims to boost annual operating profit to 450 billion yen ($4.34 billion) by the business year ending Feb. 28, 2021.

The plan includes issuing loyalty cards with identification numbers to customers to map shopping habits in order to refine offerings and marketing activities. It also calls for the closure of 40 Ito Yokado general merchandising outlets, while expanding income from its Seven Eleven convenience stores.

Seven & i last week lowered its full-year operating profit forecast for the current year ending Feb. 28 to 353 billion yen from an earlier estimate of 379 billion yen amid a downturn in consumer spending.

In the six months ended Aug. 31, operating profit rose 5.2 percent to 181 billion yen, the company also said on Thursday.

For the three months ended Aug. 31, operating profit rose 10.3 percent to 100 billion yen from 90.6 billion yen a year earlier. Thomson Reuters calculated the quarterly number by subtracting the previous quarter from the half-year figure. ($1 = 103.6000 yen) (Reporting by Tim Kelly; Editing by Christopher Cushing)